Double, double toil and trouble; Fire burn, and caldron bubble

So, is China a bubble? And, if so, when will it burst?

Christopher Balding frequently reminds us that China’s economic boom is unsustainable. And I agree. A key quote:

Want an example of this collision of increasing financial debt propping up asset prices? Major financial institutions are setting up subsidiaries or related companies that issue debt to buy bad loans at face or near face value.  They are even issuing bonds to buy bad loans.  Rather than acknowledging some significant loss taking a hair cut and lowering the asset value, they are reissuing debt to buy bad assets at near face value.

Issuing debt to buy more debt is a classic sign of financial exuberance. However, I have one problem with the scenario – the Chinese stock market. If you look at the chart below, you will see the China 50 Index was much higher in the lead up to the GFC. Indeed, there are unsurprising similarities between the Chinese market and Australia’s.

China 50 Index

I would expect an asset bubble to look more like the following:

Nikkei 1970 – 1990
Nasdaq 1994 – 2000

If we look at the broader Shanghai Composite we can see a couple “bubbly” periods in 2007 and early 2015:

Shanghai Composite

But these periods are behind us, the deleveraging in the stock market, at least, appears to have begun some time ago. Now, we may get another bubble at some point. But I’m certainly not ready to duck for cover just yet, considering that the Chinese stock market is already well off its highs.

Some have argued that the real Chinese asset bubble is in real estate, not in stocks. That may be true, as it is here in Australia. The problem is, though, when will prices fall? Steve Keen has been arguing that house prices in Australia will fall since at least 2004. That’s a long time to be completely wrong, even if he is correct in the end.


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